Britain's economy grew less than previously thought for much of the year, surprises revisions to official data revealed today, running out of steam as the mighty services sector slowed.

In what amounts to its third estimate for the third quarter, the Office for National Statistics said UK gross domestic product growth was 0.4 per cent for the three months to the end of September, down from an original estimate of 0.5 per cent.

With second quarter growth also revised lower, to 0.5 per cent from 0.7 per cent, some economists reduced their forecasts for annual growth and said there remained little pressure on the Bank of England to raise Britain's rock-bottom 0.5 per cent interest rate any time soon despite its US counterpart raising rates in America last week for the first time in nearly a decade.

The growth revisions were unexpected, with most economists forecasting growth readings to remain unchanged.

Bah humbug: Britain's economy grew less than previously thought for much of the year, official data from the Office for National Statistics revealed today, providing little festive cheer for Chancellor George Osborne

With the UK's dominant services sector weakening unexpectedly, on an annual basis, growth in the third quarter was revised down from 2.3 per cent to 2.1 per cent, the ONS said.

Services output grew by 0.6 per cent in the third quarter, against 0.7 per cent initially estimated, according to the ONS. Manufacturing output shrank by 0.4 per cent and construction contracted by 1.9 per cent.

Net trade was also a drag on Britain's economy, knocking a percentage point off growth in the third quarter.

The revised figures mean the UK economy has grown by 6.1 per cent above its pre-crisis peak, compared with an earlier estimate of 6.4 per cent.

Share this article

'However, because of the downward revisions to GDP growth in the second and third quarters, we will need to trim our projection of overall GDP growth in the 2015 from 2.4 per cent to 2.2 per cent.'

He added: 'We currently believe that the Bank of England is more likely than not to raise interest rates by mid-2016 (we expect a move in May).

'We suspect that stronger UK economic growth, a renewed pick up in earnings growth and consumer price inflation gradually trending up will prompt the MPC to act around May.

'However, the current relapse in earnings growth does increase the possibility that the Bank of England could hold off from raising interest rates until the latter months of 2016.'

A spokesman for the finance ministry pointed out that today's data showed the UK was still ahead of most of its peers in terms of growth, but also highlighted the risks still facing the economy.'

Through the years: Quarterly growth and levels of UK GDP since 2002, according to the ONS

Taking the year as a whole, what today's data revealed was that while the UK's economy has grown for 11 quarters in a row, expansion this year has been sluggish.

In the first quarter, growth slowed to 0.4 per cent, edged slightly higher to 0.5 per cent in the second quarter and slowed to 0.4 per cent in the third quarter.

For the final three months of 2015, the Bank of England has previously said it expects growth to edge higher to 0.6 per cent, but the latest revisions mean expansion for the whole of 2015 is likely to have slowed to around 2.2 per cent from nearly per cent in 2014.

David Kern, Chief Economist of the British Chambers of Commerce, said: 'It is not hugely surprising to see GDP growth downgraded slightly, as it is in line with the revisions in our own forecast earlier this month. However it is concerning that it (is) weaker growth in our dominant services sector has played a part.

'Given the slump in our manufacturing sector, our services sector will still be expected to drive economic growth as we enter 2016.'

He added: 'The sharp widening of the trade deficit will provide little festive cheer. Our exporters will need all the help they can get in order to redress this – and improved access to finance for those looking to export would be a good first step.'

The UK's recovery since 2013 has been driven in large part by spending by consumers, with today's data showing that household spending climbed more quickly than expected in the third quarter. But, the savings ratio has fallen to its joint lowest level since 1963.

Insights: 'We currently believe that the Bank of England is more likely than not to raise interest rates by mid-2016 (we expect a move in May)', Howard Archer, chief economist at IHS Global said today

In response to the GDP figures, the pound eased off earlier highs, but remained slightly higher versus the dollar at $1.4871 and the euro at €1.3610.

James Sproule, Chief Economist at the Institute of Directors, said: 'While today’s GDP figures are a disappointment, they do not as yet undermine the longer term positive outlook for the economy in 2016.

'Consumer spending was always going to be the main driver of growth in 2016, but the danger remains that EU trade disappoints and household debt rises on the back of ultra-loose monetary policy.

'The Government has said it wants to create a "higher wage, lower tax, lower welfare" economy. However, with public spending due to rise by 2.9 per cent each year, and economic growth likely to come in below that figure, it will be difficult for the Chancellor to find room to cut the tax burden.

'Further bearing down on expenditure has to remain a priority in the New Year if the Government is to achieve its goal and put the economy on a sustainable long-term path.'

Today’s data came as the latest blow to the UK economy after dire public finances figures yesterday revealed worse-than-expected borrowing in November, up by £1.3billion year-on-year to £14.2billion.

Kallum Pickering, senior UK economist at Berenberg, said the revisions have left the economy ending the year ‘on a very sour note’.

‘These changes significantly alter the quarterly growth story for 2015. Rather than a weak first quarter, a strong second quarter and an OK third quarter, disappointingly, data now show that the economy has been growing below trend all year,’ he added.

Other data also out today from the ONS showed that household disposable income rose by 0.5 per cent quarter-on-quarter in the three months to the end of September, but Britons are saving less.

The share of disposable income saved by households fell once more during the third quarter - to 4.4 per cent, down from 4.9 per cent in the previous three months.

This reinforces data showing buoyant consumer spending in the UK, but also suggests Britons may be vulnerable to interest rate rises, with little put by in savings to cushion the blow.

The Centre for Economic and Business Research (Cebr) said the growth data 'adds fuel to the existing concerns that economic growth is overly reliant on household consumption'.

There was some welcome economic cheer elsewhere as third quarter figures out separately from the ONS showed a better-than-expected current account deficit - a measure of the UK's trade gap between imports and exports.

The deficit stood at £17.5billion in the third quarter, unchanged from the previous three months and lower than expectations for it to have surged to £21.50billion. Britain's current account deficit equates to 3.7 per cent of GDP.

Comparisons: UK GDP output components growth, quarter-on-quarter from 2008, according to the ONS

*Expected profit rather than interest as the bank follows Shariah principles. For current account rewards and interest conditions may apply eg. using provider's full switching service, min deposits and direct debits. For savings, access maybe limited, min/max deposits may apply. See T&Cs. Representative example: If you spend £1,200 at a purchase interest rate of 18.95% p.a. (variable) your representative rate will be 18.9% APR (variable).

Advertisement

Share or comment on this article:

Little Christmas cheer for George Osborne as Britain's economy grows slower than expected